“Significant challenges remain in the high-cost, lengthy processes to develop new drugs and bring them to market,” says Arsenal Capital Partners‘ Jeff Kovach in this Q&A with Mergers & Acquisitions. “Technology-enabled solutions to tackle some of these challenges will be highly sought after in the market.”
Buyers are attracted to businesses and technologies focused on developing vaccines, conducting clinical trial research and delivering telehealth services. One private equity firm involved in the sector is Arsenal Capital Partners. Mergers & Acquisitions spoke with Arsenal managing partner Jeff Kovach about the firm’s investment strategy and other mid-market deal opportunities.
Tell us about Arsenal’s investment strategy.
Over 20 years ago, we set out to establish Arsenal as a highly specialized firm to build highly valuable, technology- and innovation-rich, growth companies in the mid-market. We aspired to build a firm that was purpose-driven and would have a positive impact in everything that we do.
To do this, we recruited a team with diverse backgrounds, skills, and capabilities that included deep industry insiders who understood the technology-rich industrials and healthcare landscapes. We also wanted skilled CEOs and operators who could build and shape businesses in the marketplace as well as specialized investors who understood how to balance growth and risk.
With this diverse team, we devised a truly integrated model so we could have differentiated strategic views on markets and implement our investment strategy, which we call Strategic Company Building – focused on designing, constructing, and scaling market leaders. We look for niche market-leading companies that have “multiple ways to win,” where we can drive growth organically and through strategic add-on acquisitions. We work in genuine partnership with our management teams and bring complementary resources to enhance and augment a company’s key capabilities, enabling us to build strategically valuable businesses that are highly sought after in the marketplace.
Where is Arsenal seeing opportunities in the middle-market?
The U.S. middle-market continues to be a large and attractive space for Arsenal to invest. Within our specialty industrials sector, we see numerous opportunities for companies to serve new market needs more effectively and to succeed in a changed competitive landscape. We continue to see an ongoing stream of innovation and application of technology in the specialty chemicals and materials sectors, despite dislocations and disruptions in some end markets over the last year.
Within healthcare, we see tremendous opportunities and believe Covid-19 is likely to accelerate industry-wide changes, some that were already in process before the pandemic. For example, significant challenges remain in the high-cost, lengthy processes to develop new drugs and bring them to market despite quite remarkable scientific achievements that have taken place over the last decade. Moreover, in the care provision market, we see a fundamental shift toward value-based care models replacing the fee-for-service model. Our view is that technology-enabled solutions to tackle some of these challenges will be highly sought after in the market.
What kind of deal opportunities are you seeing in the healthcare?
The pandemic is accelerating industry-wide changes that were already in process to address industry inefficiencies.
Within pharma services, we are seeing an increasing focus on the importance of immunology to treat diseases, a need for greater coordination of public and private resources to address infectious disease, and the need for virtual and distributed clinical trials to be accelerated.
Covid-19 continues to place strains on hospital systems, care providers, supplies, and services. Care provision, both in hospitals and in other settings, will need to evolve in response to the challenges and learnings of the pandemic. Within specialty care delivery, we are seeing increased opportunities to address the growing importance of value-based care, demand for coordinated care delivery models, the increased adoption of remote monitoring, and use of telehealth as important areas of focus going forward.
How have Arsenal’s healthcare portfolio companies adapted to Covid-19 challenges?
At the beginning of the pandemic, the Arsenal team quickly shifted its attention to address short-term challenges. Once our portfolio companies addressed these initial issues, we were able to focus on navigating the Covid-19 environment going forward and how each of our companies could positively impact the fight against Covid-19.
In early March, pharma research centers temporarily closed, hospitals and clinics postponed elective procedures, and non-Covid-19 related clinical trials experienced significantly delays. These factors initially disrupted operations for Arsenal’s pharma services portfolio companies. WIRB Copernicus Group, a provider of clinical trial optimization solutions, initially saw delays and postponements in its clinical trials pipeline but Covid-19 has since turned into an opportunity for the company to play a critical role in supporting clinical trial activities related to Covid-19 treatments and vaccines. Another portfolio company, CellCarta, a provider of research laboratory services, has been able to leverage its immunology expertise to support Covid-19-related vaccine development and related clinical trials, and also has built a program to provide diagnostic testing services. Hopebridge, a provider of autism treatment services, was required to temporarily close all of its centers for several weeks but successfully implemented telehealth and in-home care services as an alternative care delivery model.
What role have your healthcare portfolio companies played in the COVID-19 response?
We are incredibly proud of the contributions that our healthcare portfolio companies have been able to make in addressing this pandemic. WCG and CellCarta, have both had an instrumental role in facilitating clinical trials for Covid-19 vaccines and treatments. In addition, BioIVT, a provider of biospecimens and other in vitro research services, established mobile collection for convalescent serum and plasma. Another portfolio company, Cello Health, is working with a client to establish a media campaign to support public health awareness and increase comfort and confidence in the vaccines. Hopefully, these examples give you a sense of how impactful our healthcare companies have been in this pandemic.
What challenges have you faced closing deals during the pandemic?
In the spring of 2020, we initially focused on our existing investments, but the new platform and add-on acquisition activity in the second half of the year has made up for any pause earlier in the year. Like most investors, we have had to work through the challenges of working remotely and travel restrictions but for the most part, I am proud of our team for thinking creatively to overcome these disruptions. We have been active users of video conferences, have conducted numerous meetings outdoors, and have overcome travel restrictions by leveraging local resources and networks when possible.
What is your outlook on M&A for 2021?
Although Covid-19 created significant disruptions, many sectors of the U.S. economy have experienced a quicker than anticipated rebound. However, we are not anticipating a full recovery of the U.S. economy until 2022 at the earliest. That being said, I believe that opportunities to acquire and build technology-enabled industrial and healthcare companies continue to exist. We have been able to progress a number of our sub-sector investment strategies over the course of the last few months, and I believe that this work is likely to result in several new acquisitions in 2021. Developing differentiated investment strategies and having multiple ways to create value are more critical than ever given the robust valuations that we see generally in the M&A market.